INSUBCONTINENT EXCLUSIVE:
Edelweiss Financial Services has a buy call on YES Bank with a target price of Rs 273.
The current market price of YES Bank is Rs
183.45.
Time period given by the brokerage is one year when YES Bank price can reach the defined target.
Investment rationale by
Disappointment flowed from deviation in asset quality guidance issued in early October
Strong retail franchise creation continued (CASA of gt;33 per cent, retail asset growth of gt;100 per cent) and overall credit growth also
came in higher at gt;60 per cent
However, the road ahead will be arduous given: a) management change uncertainty; b) overhang of impending RBI divergence financial
implication of INR26bn ILFS exposure; and c) capital constraints, which could restrict growth momentum
Factoring higher provisions (NPLs investment depreciation) we prune FY19/FY20E EPS by 12 per cent/7 per cent
Also, we cut target multiple to 1.9x (2.5x earlier), leading to the revised target price of Rs 273 (earlier Rs 375).
Asset quality takes a
accounts: a) Rs 6.3bn exposure to diversified group as bridge finance contingent on asset sale (likely repayment in Q3FY19); and b) Rs 4.5bn
account, which was sold to an ARC
While Yes Bank maintained credit cost guidance of 50-70bps (34bps in H1FY19), its exposure to ILFS (Rs 26bn, towards SPV and subsidiary,
still standard), along with impending divergence report and management change cast a shadow on credit cost guidance and renders earnings
We are building 1.2 per cent credit cost.
Outlook and valuations: Even though the retail segment continues to strengthen, visibility on
corporate earnings are weak
The guidance miss raises doubts about corporate stress recognition, which will be an overhang (impending divergence)
Moreover, we expect near-to-medium term challenges to persist given management change uncertainty, which poses a challenge to capital
raising (needed to scale up franchise)
In this backdrop, we expect valuations to be capped at 1.9x FY20E P/BV, resulting in the target price of Rs 273
However, strong franchise and superior RoE profile render risk-reward favourable from a long-term perspective
